Skip to comments.Gold's Decline: A Minor Dip In An Ongoing Rally
Posted on 04/16/2013 6:30:07 AM PDT by SeekAndFind
In the opening years of the last decade, most mainstream investors sat on the sidelines while "tin hat" goldbugs rode the bull market from below $300 to just over $1,000 per ounce. But following the 2008 financial crisis, when gold held up better than stocks during the decline and made new record highs long before the Dow Jones fully recovered, Wall Street finally sat up and took notice. The new devotees helped to push gold to nearly $1,900 by September of 2011. For the next year and a half it held relatively steady, trading mostly between $1,500 and $1,800 as more mainstream investors caught the fever. But now it appears that the brief love affair is at an end. It was really only a flirtation as the two were never a good match in the first place. Gold's new suitors never understood the fundamental case for gold and now they are turning their affection back to their true love: U.S. equities.
This is creating a brutal season for gold investors. The metal is in the midst of its largest pull back in nearly five years, and as the selling has gathered momentum powerful Wall Street voices as diverse as Goldman Sachs and George Soros have declared the end of its nearly fifteen year run of dominance.
The story line put out by most of these analysts is that gold shined as a safe haven during the Great Recession, but its allure has evaporated with the recent "improvements" in the global economy, particularly in the United States. Ironically, this ignores the fact that gold actually performed better in the years leading up to the 2008 financial crisis than it did during or following the crisis. That may be because the inflationary monetary policy that fueled the housing bubble also powered gold. Deflation fears led to gold's 35% decline in 2008, but once the Fed reopened the monetary spigots gold rallied to new highs. But in 2008 gold fell in concert with nearly every other asset class. This time, it's falling while other assets are rising. The negative spotlight makes the current decline potentially more meaningful.
Neither the new round of Keynesian expansion in Japan nor the recent fallout from the Cypriot solvency crisis produced gold rallies. Bears cite these failures as the signs that the bull is dead. The latest warning bell came late last week when the Bank of Cyprus announced that it would be selling its gold reserves in order to raise the cash to pay its debts. Concerns quickly spread that other heavily indebted Mediterranean countries with large gold reserves like Greece, Portugal, Italy and Spain would follow suit. The tidal wave of selling would be expected to be the coup de grace for gold's glory years. While this neat narrative may be sufficient to convince the financial media that an historic shift is underway, wiser minds will see more nuance.
While the vast majority of economists see gold as the "barbarous relic" described by Keynes, the sentiment has not stopped many central bankers from holding huge quantities as currency reserves. It is a curious phenomenon that the countries with the most daunting debt problems have the highest percentage of gold in their foreign exchange reserves. Many of these countries were formerly prosperous, and at various points in their histories had gold-backed currencies that required large reserves. These legacy assets now account for the bulk of their reserve wealth.
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I remember in 2007 this old guy calls Steve Drake, or someone like him (financial dude on radio), and says that he keeps hearing that the economy is about to crash and that he needs to get out of stocks now and into gold (then $600 per ounce). Steve then asks him where he heard such garbage, and he says during talk radio commercials.
Steve then reassures the old guy by telling him that if that were the case, the EXPERTS, the people with far more information and expertise, would be pulling out of the market...so it’s best to stay in and not let “talk radio” affect investment decisions. He thanks Steve, and is happy to have called and gotten such excellent advice.
Needless to say, that guy’s retirement ended up a lot poorer due to Steve.
I have only one question:
Where would Cyprus be if they had no gold?
That is the question not only for Cyprus but for those of us who worry about paper “assets”.
I have only one question:
Where would Cyprus be if they had no gold?
That is the question not only for Cyprus but for those of us who worry about paper assets.
I’m feeling contrary right now, so I’ll go with “Better Off”.
Why? Because there is the possibility however slight that their Gold Reserves were the final target after all. And the heck with any damage caused to get them into the Hands of Germany and the EU.
Mind you it’s just a theory... Stranger things have been happening lately.
The “regime” is printing $80 BILLION every month........nuff said.
Something interesting for your reference:
Germany Snatches Gold From Cyprus
Just when it appeared the news cycle had moved on from Cyprus, the island nation came splashing back yesterday with news from the European Commission: Nicosia will be made to sell around three quarters, or 400 million (US$523.7 million), of its excess gold reserves. (Excess? Who has too much gold?)
Whats the big deal? ask some. When a person or nation is in a financial pinch, assets have to be liquidated.
True. But with Cyprus its not that simple. From the outset of this crisis, Cyprus has not been in control of its own destiny. Sure, Cypriot President Nicos Anastasiades was in on most, though apparently not all, of the discussions. Cypruss parliament voted on this and that, and ultimately agreed to the bailout agreement. But it was all smoke and mirrors. In the end, Cyprus was compelled to agree to a ruinous bailout package created and prescribed by Germany in consort with the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF). Now we learn from the troika that as part of the bailout agreement, Cyprus will have to sell the majority of its gold.
The important point to note is that this decision was effectively made by Germany and its ECB/EC/IMF allies, AND NOT CYPRUS.
When a nation no longer has control over its national assets, can it still be considered a sovereign state? Also, consider the tremendous power at Berlins disposal if it possesses the leverage to compel another nation to sell a core national asset. Moreover, we learned yesterday that Germany not only has the power to crush a nations sovereignty, it also has the motive!
More people need to be alarmed by this. Europes financial crisis began in 2008, and since then a number of eurozone states have had to go to Germany and the EU for money. Berlin has generally responded by demanding some fairly stringent austerity measures in return for bailout money. Yet, although it has demanded austerity, Berlin has not asked or compelled a single eurozone country in need of a bailout (like Greece, Ireland, Portugal) to sell part or all of its gold reserves.
We should note that Wednesday evening the Central Bank of Cyprus (CBC) denied the report that Cyprus will sell some of its gold. The announcement of the gold sale, however, came from the European Commission, which, together with the IMF and the ECB, and under Germanys direction, is actually responsible for drawing up Cypruss bailout. Also, the media and analysts paid little attention to the CBCs denial and continue to report that this is happening. I wonder if the Central Bank of Cyprus simply hasnt been told that its selling its gold?
To raise the desired 400 million, Cyprus will have to sell around 10.36 tons of gold (at the current price). The nation owns about 13.9 tons of gold, according to the World Gold Council. So it will have to depart with about 74.5 percent, NEARLY THREE QUARTERS, of its total reserve. Again, Cyprus didnt decide to sell, it was told by the German-led troika that it must sell if it wants bailout money.
Who will it sell the gold to? Its almost certain the buyers will be the European Central Bank and the International Monetary Fund. After all, theyre the ones, with Germanys sanction, bailing out Cyprus. The IMF and the ECB possess about 2,814 tons and 502 tons of gold respectively. Germany has 3,391 tons, and is the worlds second-largest holder of gold. Together, this amounts to 6,707 tons of gold. That equals about 82 percent of Americas total gold supply.
Note: That figure DOES NOT include the gold reserves of other European countries. And if Cyprus is a precedent, then some of this gold could also start to make its way to Brussels and Frankfurt. I think this could be a turning point, said Jonathan Spall, director of precious metals at Barclays Capital. Central bank stocks of gold which had looked to be ring-fenced in the bailout process COULD NOW SEEMINGLY COME INTO PLAY.
What if Germany and the ECB make a play for gold owned by other ailing European economies?
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As a gold saver the peaks are nice and the dips are nicer. The peaks are nice because I know the market is overbought and I will be able to buy more on the next dip. The dips are nice because I get to stuff 20 or 30% more gold into the mattress.
"Investing" in gold is quite frankly stupid. It is not an investment, at best it is speculation. Gold is simply savings, and the only difference from paper dollars is that the government can't steal it via inflation.
Remember that if the "experts" were always right, then they'd be on a beach sipping Pina Coladas and collecting 20%..... Not going in to work every morning and hawking their product on AM radio.
In general, Drake's advice was good, and I'd have said the same thing. Might have hedged a little - "Want to risk 10% of your portfolio in gold? Sure!" - but that's also with the benefit of hindsight.
At the end of the day, you make a decision with the best info you have, and you live with the consequences.
So much for the title, Schiff never mentions either "dip" or a "rally". The closest he comes is with vague talk suggesting that maybe there are some nations that will expand their gold reserves enough to support or possibly raise gold's market price. Fat chance.
Right now total government gold reserves total about 37,000 tons of gold. Ordinary people have six times as much, mostly as jewelry, and world gold mining production is 2,740 tons every year. OK, so nobody knows the future, but we do know that total national gold reserves are no more than they were eight years ago and that it's simply not possible that governments are able to --much less are willing to-- prop up the price of gold out of nowhere with a monstrous reserve expansion.
A good article, it appears that more than a few people are thinking that there are plans on gaining control over as much gold as possible.
I’ve said it before, This economy, as large as it is, is based on trust. I think that the trust has been broken. Broken by governments, Federal, EU, Worldwide and local and the various financial institutions beginning with the Central bankers. It’s just a matter of time now before the shock waves of that broken trust start the “earthquake” of Worldwide economic collapse.
The saddest thing about that is that it never need occur. Overweening pride and greed of some is going to cause economic chaos for the rest.
OK, but I don’t think it changes the basics.
What happens when all of the sellers have sold what they have?
They will continue printing paper with no backing and therefore no safety net for them should their paper become of little or no value.
It would seem to me that would cause the citizens of those countries to purchase gold for their own protection.
Certainly gold will go down short term, but long term it still looks like good insurance.
What-- the suffering of the masses is always the fault of someone else's greed?
imho the vast majority of those that suffer do so at their own hand from their own willful ignorance and their own greed. We're looking at a republic --a world for that matter-- being taken over by folks thinking they're guaranteed a full time living for just part time effort.
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